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TMI Blog1997 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... question No. 2 was answered against the assessee and in favour of the Revenue. The said question was in these terms : "Whether the Tribunal was right in holding that on the facts and in the circumstances of the case, the exchange of one security for another could be described as realisation of the security resulting in profit ?" The matter relates to the assessment year 1963-64 for which the relevant previous year ended on July 31, 1962. The assessee is a company dealing in shares. It was holding 14,500 shares in Asiatic Oxygen and Acetylene Company Limited (hereinafter referred to as "the first company"), of the face value of Rs. 10 each as its stock-in-trade. The said shares were valued by the assessee at Rs. 1,45,000 (the cost price) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on further appeal the Tribunal rejected the contention of the assessee that the transaction did not result in any profit. The Tribunal rejected the application of the assessee for referring to the High Court for its opinion the questions raised by the assessee but the High Court by order dated February 18, 1974, directed the Tribunal to state a case and refer the two questions raised by the assessee and, consequently, the two questions were referred by the Tribunal out of which question No. 2 has been answered against the assessee by the High Court by the impugned judgment. Shri H. K. Puri, learned counsel for the assessee, has urged that the High Court was in error in answering the said question against the assessee. According to Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the security on the date of such surrender and exchange. If it can be so regarded then the sum of Rs. 4,06,000, the difference between the book value of 14,500 shares of the first company and the market value of the 55,100 shares of the second company as on the date of such realisation, will have to be treated as profit earned by the assessee in that transaction. In the impugned judgment, the High Court has agreed with the decision of the Tribunal that the exchange of the shares of the first company for the shares of the second company is to be treated as realisation of the security. The said view of the High Court, as will be presently seen, is in consonance with the established principles governing the law in this field. In Westmin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. In the case of Royal Insurance Co. Ltd. v. Stephen [1928] 14 TC 22 (KB) the appellant company had, under the Railways Act, 1921, to accept new stocks in the amalgamated companies in exchange for the stock held in the companies which were absorbed and which resulted in loss to the appellant-company. The claim of the appellant-company for deduction of such loss was upheld by Rowlatt J. who held : "At the bottom of this principle of waiting for a realisation, I think there is this idea : while an investment is going up or down for income-tax purposes the company cannot take any notice of fluctuations, but it has to take notice of them when all that state of affairs comes to an end, when that investment is wound up--I will say 'wound up' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , except when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so. I cannot think that income-tax is due or not according to the manner in which the person making the profit pleases to deal with it." These observations have been quoted with approval by this court in Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378. In that case, the assessee, carrying on the business of money-lending, had obtained a decree against a debtor and had received the Encumbered Estates Bonds of the U. P. Government in part satisfaction of the liability of the debtor. The said bonds were sold by the appellant in the year relevant to the assessment year subsequent to the year in which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was neither a sale of the option nor its exchange for something else and that when the company exercised their option or used or availed themselves of their rights they did not make the end of the trading transaction and that there was merely the end of the beginning of a trading transaction. It was emphasised that there was no element of exchange as there was in Royal Insurance Co. Ltd. v. Stephen [1928] 14 TC 22 (KB) and in Westminster Bank Ltd. v. Osler (Inspector of Taxes) [1933] 1 ITR 65 (HL). (see Lord Morris of Borth-y-Gest-at pages 394 and 395). Lord Guest, in his dissenting judgment, however, felt that the option was a trading asset of the appellant-company and, applying the principles laid down in Royal Insurance Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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